ACCOUNTING TIPS & NEWS
5 reasons engineering companies need more than just yearly bookkeeping
By Anna Kovchina, CMA & Founder of AKcounting, LLC – ak-counting.com
I believe that all companies benefit from more than just compliance services, but it is critical for engineering companies to have robust project tracking and financial management systems.
Engineering projects often involve complex, long-term engagements that require meticulous monitoring of labor and expenses. Here’s why comprehensive financial management is essential for engineering companies:
1. Track Projects in Detail
Engineering companies need systems that allow tracking of labor expenses by project, to differentiate between billable and unbillable time, and allocate expenses to specific projects or to categorize them as overhead. This level of detail demands teamwork, clear assignment of responsibilities, and strict adherence to deadlines for entering data and documents. Without such systems, critical invoicing opportunities may be missed, leading to lost revenue.
TIP: Don’t rely on team members to report expenses for projects to the accountant. If you have multiple team members reporting expenses, critical costs can be missed and tracking is tedious. Instead, create a system so expenses can be easily tracked.
2. Streamline Accountability and Documentation
A robust accounting system ensures that expenses are easily traced back to the individuals who incurred them, which is crucial for accountability. Additionally, proper documentation of billable expenses is vital for client transparency and trust.
TIP: As an accountant, I do ask for documents and will even remind the team – that’s a part of my job. However, adding a streamlined process and system will help cut down on time, add efficiency and help your business recover costs more effectively.
3. Offer Competitive Proposals with More Predictable Budgets
Every engineering project begins with a proposal and an estimated budget. These projects can extend over several months or even years, and the initial budget agreed upon with the client often has limited flexibility. Requesting an additional budget from the client can be challenging. Therefore, having accurate, project-specific data is essential for creating realistic and competitive budget proposals.
TIP: Clear communication and setting expectations is essential. Informing the client as soon as possible improves the chances of approval. To make this request effectively, up-to-date project data is necessary.
4. Analyze Project Profitability
To assess project profitability, engineering companies must analyze two layers:
TIP: Gross Margin Calculation – Compare the project’s revenue to its direct costs to determine the gross margin. This calculation helps in evaluating and prioritizing projects based on their financial performance. It’s beneficial to include hidden costs, such as unbillable hours directly associated with the project, for a more comprehensive analysis.
TIP: Overall Profitability – Examine whether the total of all project margins covers the company’s overhead expenses and generates a profit. This analysis ensures that the company remains financially healthy overall.
5. Manage Cash Flow
For project-based work, maintaining healthy cash flow is crucial. It’s not enough to be profitable; the company must also have sufficient cash flow to pay employees and vendors. Effective cash flow management involves timing the inflows from client invoices and the outflows for payroll and vendor payments. Without careful management, even profitable projects can lead to cash flow problems, jeopardizing the company’s financial stability.
CONCLUSION
In summary, engineering companies require more than just yearly bookkeeping to thrive. They need comprehensive financial management systems that provide detailed project tracking, accountability, accurate budgeting, profitability analysis, and effective cash flow management. These systems ensure that projects are completed efficiently, expenses are properly managed, and the company remains financially sound.
ABOUT ANNA KOVCHINA, CMA
Anna Kovchina, CMA is the Founder of AKcounting, LLC. Anna Kovchina has extensive experience in financial accounting from multinational corporations – including Hyundai – to emerging startups.
“I believe clear communication is the most important aspect of my role. Clients know they can expect professional, dependable support and and that I will get to know their businesses to provide the best guidance and advice possible.”
Get more helpful tips and information about Anna’s Bookkeeping and Accounting for small and growing businesses at AK-Counting.com
